Well, one IPO we were eagerly awaiting is no longer on this year’s docket with Tekmira’s (NASDAQ:TKMR) merger agreement with Oncore announced tonight all plans for any anticipated IPO this year are now null and void. However, we believe TKMR will trade similar to an IPO tomorrow with additional speculative interest centered on “who will buy the combined TKMR/Oncore NewCo now?” especially given the intense focus on the sector with the JP Morgan Healthcare Conference kicking-off this week as well.
The speculative conditions are ideal for the sector this week, and we believe TKMR has ample upside. We believe the newly combined TKMR/Oncore now has a fundamental floor value at current valuations ($750M) using real-world M&A transactional analysis.
Our “off-the-cuff” model used the average M&A EV/Sales multiple since 2007-2014 of 12.6x EV/Revs according to GS as a rudimentary valuation tool to derive our target price of $28.51 per share by year end representing ~79% upside from Friday’s close.
Who knows: perhaps something else could arise in the HBV area this week with Arrowhead Research (NASDAQ:ARWR), Alnylam (NASDAQ:ALNY), Isis Pharmaceutical’s (NASDAQ:ISIS), or Globeimmune (NASDAQ:GBIM) given the bountiful number of BioPharma’s business development heads all convening in San Francisco this week.
Using this multiple as a proxy with 2016E consensus/bull Revenue estimates of $76M and $168M respectively (according to Thomson One see table below) gives us our M&A takeover valuation of $2.16B (un-risk adjusted); risk adjusting this valuation at 35% produces our fundamental floor value of $740M (35% * [12.6x * $168M 2016E Revs]).
But important to our discussion here on the valuation of TKMR/Oncore, NPSP’s valuation of $5.2B unambiguously validates our approach that was consummated this weekend at 11.7x Merrill Lynch’s 2016E sales of $443M (11.7x * $443M=$5.2B) only a -6.8% discount to the average of 12.6x.
This supports our thesis that HBV driven M&A expectations will support our risk-adjusted “floor valuation” of $740M representing the proverbial “takeover premium in the stock,” and with several value-unlocking catalysts (see table below) throughout 2015 this could easily drive additional upside above our estimated price target of $28.51. Conversely, if data readouts are negative we see valuation supported at current levels from the January 09th close at $15.70.
Furthermore, our valuation is based on pre-TKMR/Oncore standalone estimates, which we are confident that there remains significant upside above our target of $28.51. The JPM conference is known as a breeding ground for deal activity and the potential combined TKMR/Oncore pipeline undoubtedly has upside to our estimates through the potential out-licensing of key assets to larger companies who are already keenly interested in HBV.
Indeed, once again GILD comes immediately to mind, and yes, they do have the cash flows to do about as many deals as they see fit (MGNX, INCY among other potential partners or targets). ARWR could trade off on this development, but given their lead-time in the clinic with data pending would likely be an opportunity to get long. Being first to market in HBV matters; and higher dose data is expected this year to deliver that somewhat arbitrary 1-log reduction in HBV S-antigen.
We estimate there is a 35% probability of an M&A deal based on historical transactions from 2004-2013 showing that 20-54% of M&A deals completed in the sector had a market cap between $200M-$1B. The combined TKMR/Oncore valuation fully diluted using the treasury adjusted method is ~$750M, after tomorrows inevitable rally it will likely have a market capitalization in excess of $1B. Furthermore, ~23% (1-0.77=23%) of transactions in 2013 had <$20mm in revenues.
So to get our probability of M&A we use 23% +54%= 77%/2= 38.5%, and round down to an even 35%. Applying this produces a quick M&A valuation of $2.12B (un-risk adjusted) and risk adjusted valuation of $741M just for the M&A potential and ignores all potential value from the potential from Oncore’s pipeline and potential drug combination strategies that could lead to a dominant HBV franchise.
We suspect that our takeover valuation could double after doing a thorough DCF model on Oncore’s pipeline- stay tuned- and work is in progress. But we have confidence that these preliminary estimates will prove conservative on Monday morning and soon thereafter.
Lastly, TKMR’s 3-year, weekly chart looks bullish with long-term trendline support currently at $13.15, but projects up to $14.66 by March 2015. These major fundamental shifts in conjunction with bullish technical setup skew the near term risks to the upside.
We don’t see major resistance until the 61.8% retracement at $22.03, and expect a possible gap up into this area in the morning. Should this occur the weekly Ichimoku cloud for this week is currently at $16.00-$18.04 and should serve as major support. The weekly MACD is ready to make a bullish crossover with plenty of room for momentum to run to the upside. The slow stochastics and RSI are already bullish.
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